As I know even less about economics than I do law you’ll be happy to know this isn’t an opinion piece but a summary of the documentary series. With thanks to Robert Peston ©BBC, December 2011.
The 2008 Crash will likely lead to the worst decline in the real standard of living since the Great Depression. There have been a variety of documentary treatments of the Crash ranging from Charles Ferguson’s award-winning Inside Job to Michael Moore’s lighthearted yet heartbreaking Capitalism: A Love Story. All such treatments are necessarily inadequate due to the complexity of the events (especially my personal favourite, Adam Curtis’ All Watched Over by Machines of Loving Grace – since that tried to cover the Crash in a couple of minutes!). While I would like to compare their perspectives for you, I really am far too ignorant of how money works to do so (both the books I’ve bought on the financial crisis appear resolute in their determination to remain unread). Perhaps Peston (the BBC News economics editor) will enlighten me?
If you live in Britain you will have long since tired of the media trend of ‘banker bashing’, blaming bankers for the recession. I shouldn’t need to say that to do so is a simplistic, over-generalised, exaggeration. But doesn’t stop it being the right attitude for us to take, and it does look to me as if the actions of bankers (the bad ones) were the biggest cause. Peston’s documentary was where the chairman of RBS (the bank that needed the most public refinancing), Sir Philip Hammond famously said that he was shocked that the Occupy protests against the banks had taken so long to develop. Sadly its obligatory that I now mention Sir Fred -inevitably rhymed with ‘the shred’ – Goodwin, poster boy of the toxic culture of bankers’ bonuses and gold-plated pensions. (I assume banker’s pensions are in gold anyway so this must mean gold-plated gold? How does that work??). Mentioned and shamed.
Yet it is seldom been noted that the practice of rewarding failure at the top of businesses, particularly in the finance industry, did not start with those in charge at the time of the Crash, but was well established in the better times and tolerated by a naively Thatcherite government. For example, in 2003 as the value of the FTSE-100 index had halved since the burst of the ‘dot com bubble’ top executives had voted themselves a pay rise of an average of 85%, in defiance of the tumbling of wage levels in the population as whole that they’d been instrumental in facilitating.
The boom before the recent crisis was facilitated globalisation and fuelled by the growth of East Asian economies (and to a lesser extent India). The combination of technological innovation and increasingly urbanised societies allowed them to produce masses of exports that were cheap for us. Clinton and Blair were both emphatically in favour of globalised free markets as an example of inevitable ‘progress’.
The British public became addicted to having lots of these consumer goods and we borrowed far more than we could pay back to do so. It didn’t help that the government allowed credit to become easier to acquire than ever before, and propagated the idea of perpetual economic growth. Though it was only because of the capital cheaply available on loan from the prospering Asian countries that the government was able to do this.
There was an explosion in the strength of Britain’s financial sector in 1986. Banks became able to buy up stock brokerage firms to supercharge investment. At the same time in the US Alan Greenspan was appointed as head of the Federal Reserve and began to deconstruct the regulation of the finance sector there. Peston remarks that “banking became too interesting, too sexy.”
One thing that deregulation promoted, at the most general level, was the practise of reorganising rather than minimising debts. Financial powers pressured governments to allow this because they wanted to hold onto the financial revolution started by Thatcher that had seen their businesses grow so much, and which had allowed them to vote themselves massive pay rises- in spite of wages falling for the bottom section of society. The pernicious normalisation of consumption based on debt legitimised this as the status quo. The general population carried on consuming more as their real wages fell.
In 1989 Chinese leader Deng Xiaoping embarked on his ‘Glorious Tour’ of the nation. With the intention of appeasing the population after the Tienanmen Square massacre he outlined the opening of capitalist markets. Chinese people save around three times as much of their income as we do (but due to our loans we have no net savings!) while spending under half of what we do relative to the size of our respective economies. This is partly because of our cultural fetish for owning a large house, and partly because of our more Americanised consumer ideology.
That there was a borrowing boom while money was ‘cheap’ and liquidity high means that now it that they are not, the debts appear inflated (the government could take regulatory action to stop this) and will be harder to pay back. This happened because East Asian countries, especially China, bought up US dollars to make them cheaper and maintain US consumption of their goods.
A big impetus for this occurred in 1999 when Western financiers suddenly pulled-out of several smaller East Asian economies, causing a local crisis after which the effected nations vowed that economic dependence would henceforth always flow in the other direction. The Western dependency that emerged was made worse still because all the major financial regulators on both sides of the Atlantic responded not trying to prudently rearrange the global movement of money but by cutting interest rates ever more sharply. With Western currencies devaluing these rates really needed to be raised.
British banks -particularly RBS- took on massive loans from overseas in 2007 and this exacerbated the crisis. This shows Neo-liberal capitalism was clearly flawed- even the the boss of RBS admits that markets are not self regulating and we need much more regulation- though he didn’t specify who he thinks should do it.
Peston presents Greece as an ideal type of a recession or debt crisis for us to study. One rather basic error the Greek government made was not using their EU funds for what they were meant for. When a country goes bankrupt the people tend to keep working but do not get paid, as is often the case in Greece now. If the Eurozone collapses this could happen in other countries such as Italy, Portugal, Ireland and Spain- and would have a very negative effect on the UK too. Globalisation provides to possibility of each country’s economy ‘knocking out’ each other’s in a catastrophic meltdown of mutually assured impoverisation.
Yet Britain’s economy is presently five times more in debt than that of Greece, due to our extremely high rate of private in addition to government debt. Peston points to the fact that in 2008 the average Briton borrowed 180% of what they earned, while in China of course the average person saved money.
A critical problem for the growth of Britain’s economy stems from the large proportion of businesses that are joint stock companies, and the power that shareholders thereby collectively have to indirectly influence socio-economic developments. The problem is the motivation behind such businesses: stock holders (at least on aggregate) are only after short term profits, the attainment of which is not in the long term interests of the businesses. This will of course have a harmful influence on the economy as a whole. Even if the joint stock arrangements could be regulated so that they aim at the long term success of businesses, they would still be always pushing for lower and lower wage costs and as a result relocating to the lesser developed countries.
The relocation of businesses been a massive problem in the UK in the last decades. One little known factor in this is that British manufacturing firms have to import their components and thus they may as well move to countries where those components they use are produced.
Also crucial to promoting economic growth is socially recognising the importance of education to innovation and business development. Today’s small firms are tomorrow’s big firms- that is close as you get to a firm fact in economics. The East Asian countries have an advantage here because in their culture children actually like to learn.
If we are to encourage people not to take on debt, then our university system is going to encourage students (and to a much greater extent graduates) to aim at only the most lucrative jobs in to pay off their debts. This is a very risky cultural trend to encourage, not only because such jobs are rarely socially useful (or even personally rewarding), but also because of the way it shapes our economy. The City is already six times larger as a proportion of our economy as Wall Street’s is of the USA’s – and Wall Street is a big proportion of their economy! Evidently, our economy is very imbalanced. Taking a Durkheimian approach, Peston urges we need to ensure banks are made to function for the health of society as a whole, rather than dominating and distorting it.
Surprisingly, in the view of Business Secretary (and left-winger) Vince Cable’s it is the banks that got too big and not the financial industry as a whole, but Peston does not agree. Britain, he argues, is merely a consumption society. It is a warehouse providing services which moves products around the world but without producing itself. If we are to avoid terminal decline such as seen in Greece we need to convert into an export and manufacturing (or manu-serve) based economy with a population that saves money – like China or to a lesser extent, Germany.
For my liking Peston didn’t go into a detailed enough explanation of where the finance was coming from, instead only briefly referencing the Asian Tigers. It would have been particularly significant to hear who authorised these loans to the West when it didn’t look like we were going to be able to pay them back, and indeed what the repayment schedules look like.
Considering the two factors identified above as our biggest economic problems: businesses that are wrongly motivated and an economy that is dangerously balanced towards the financial industry and away from manufacturing, it seemed a glaring omission not to explicitly lay the blame for each of these where it obviously lies: Thatcher’s governments. Indeed, the Coalition government is not only similar to hers in the accelerated cuts they are making, but more significantly in the ideological fashion in which they are being arranged. When will they stop parroting their incessant mantra that Labour caused the financial crisis as an excuse for not making cuts in a way that would defend meritocracy? Your parents’ party may be over, but for the new elites soon to arise in this restructured society the party is yet to get truly started; make no mistake, we shall we take the fight to them!!